Nationalization is not a concept that many Americans find appealing, which may explain why the government's attempts to clean up the mess in the financial sector seem to be generating fear rather than confidence. What is going on looks like a creep toward government control and even ownership of banks.
On Friday, the Treasury announced it would increase its stake in Citigroup from 8 percent to 36 percent. Since this is the third effort to rescue the battered giant, no one is sure it will be the last. A sell-off of financial stocks ensued.
This followed the market's negative reaction to Treasury Secretary Timothy Geithner's earlier plan for restoring banks to health. One of its components is the option of buying stakes in banks that can't raise private capital.
Why the gloom? Partly because each effort to right the banking industry forces investors to admit that things are worse than they suspected. But partly it stems from a fear that Washington's growing role means decisions will be made for political reasons rather than economic ones.
Citigroup CEO Vikram Pandit has made his share of mistakes, but he probably knows more about how to run a bank than, say, House Financial Services Committee Chairman Barney Frank. Many members of Congress seem more interested in tarring and feathering bank executives than in helping them to get credit flowing again.
"Nationalization" is not a bad thing if it means the government takes over a failing bank so it can protect depositors, wipe out shareholders and quickly sell the institution back into private hands. That's not socialism but a form of bankruptcy reorganization. On the other hand, if it means empowering bureaucrats to decide where loans and investment will go, investors can expect even worse problems than we have now.
Government investment seems to be the direction the Obama administration is leaning, as a way to inject capital into struggling banks - which in turn is supposed to revive their lending. But it doesn't solve the problem of toxic debt, particularly mortgage-backed securities, that landed them in the soup to begin with.
The most plausible remedy is what the Treasury Department proposed in September - spending hundreds of billions to buy up this dubious debt. Having banished the paralyzing uncertainties about their balance sheets, banks would find it much easier to attract private capital.
But the government has been hung up on trying not to spend too much for securities whose values are hard to assess, for fear of taking losses. It's an understandable fear but, in this case, a self-defeating one. Taxpayers are certainly not profiting from endless uncertainty.
The Treasury would do better to pay generously for these assets and trust that by facilitating economic recovery, it will bolster the returns it will get when it eventually sells them. This is not a perfect solution, but compared to government-run banks it looks like a bargain.
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